Employee Performance Appraisal: The (Un) Suitability of

Management by Objectives and Key Result Areas

Arvind Sudarsan *
Abstract
Organizations employ people for their work contributions, but there is no consensus as to how
employees should be appraised. Thi s paper investigates the use of Management by Objectives (MBO)
and Key Result Areas (KRAs) as a basis for performance evaluation. It finds that almost all
organizations use work achievements and a significant number appear to use an MBO approach as
well. However, it appears that the MBO type approach as practised by some organizations is flawed
and that MBO is in general not appropriate for individual employees. The use of KRA based targets
across all functions and levels is also not recommended. Instead a comprehensive framework to
determine appraisal criteria is suggested. This paper is relevant to all enterprises that carry out
performance appraisals.

Keywords: Performance appraisal, management by objectives

Introduction
Performance appraisal is t he activity
concerned with determining the
contributions of individuals to the
organizations they are associated with and
is present in all enterprises where
employees report to superiors, irrespective
of industry, function or level. However
there is considerable debate, as yet
unsettled, as to how employees should be
appraised. Various researchers
(Aldakhilallah and Parente, 2002; Asopa
and Beye, 1997; and Cardy, 2004) have
discussed this point and concluded that
essentially three approaches to
performance appraisal are possible. The
results focused approach is concerned
with whether the job has been done or not.
Employees are rewarded for meeting or
exceeding performance targets. The
behavioural method is concerned with
employee behaviour. The focus is on
whether an employee is doing things in the
right way, and not on the amount of output
as such. The advantage this approach has
is that it becomes relatively to analyze and
identify where a person is going wrong and
to suggest steps to correct the same.
Finally, the person-centred approach is
concerned with measures of personal
characteristics such as knowledge, skills
and ability.
Employees are rated higher based on
whether they possess the characteristics
that are deemed to be superior. A high
rating may be given to an individual for
possessing formal qualifications or being
certified as competent regardless of actual
performance, or contribution to group
efforts.
The earliest appraisals were trait based.
Gradually, thereafter organizations turned
to the appraisal of performance and
behaviours. One of the major influences
that swayed opinions in this direction was
the work of Peter Drucker (Drucker, 1955)

* Assistant Professor, BITS, Pilani (Management Group), Rajasthan 333031, India, Email: arvinds13@yahoo.co.uk

CURIE, 2009, Vol. 2, No. 2 47 BITS, Pilani

 Employee Performance Apprai sal: The (Un) Suitability of Management by Objectives and Key Result Areas
postulating the theory of Management by
Objectives (MBO). Another was a criticism
of performance appraisal, by Douglas
McGregor (McGregor, 1962) with its
celebrated comment that ‘managers don’t
like “playing God”’. McGregor argued that
managers were reluctant to appraise and
even more reluctant to conduct appraisal
interviews because, among other things,
they lacked the skill and doubted the
validity of the appraisal instrument. The
focus of McGregor’s disapproval was the
use of traits for appraisal. His solution was
to suggest appraisal of performance based
on Drucker’s concept of MBO, by which
performance would be measured against
goals set by the employees themselves.
While work output had perhaps been a
factor in performance appraisal earlier, the
theory of MBO propounded by Drucker
(1955) remains till date one of the main
intellectual inspirations for the use of
performance as the appraisal criterion.
Drucker advocated the use of objectives as
performance standards. Unit managers
were expected to participate in the process
and help to set their own goals. In theory,
organizations would develop a cascadi ng
system of objectives linking units to the
organization. The contributions of the units
would therefore directly reflect on
achievement of organizational objectives.
In the Indian context, various researchers
have studied appraisal systems and the
approaches used by organizations,
including Rudrabasavaraj, (1969 and
1977), Bolar, (1978), Basu, (1988), and
Rao, Rao, and Yadav, (2001). However, it
appears that few researchers have tried to
examine how organizations actually put the
approaches into practice or even whether
such approaches are appropriate in the
Indian situation. One exception is Sethi
(1974), who questions whether the implicit
assumptions of MBO are realistic.
However, he too suggests that work output
should be the basis for determining
CURIE, 2009, Vol. 2, No. 2
performance. The purpose of this paper is
to determine the suitability of the use of
objectives and Key Result Areas (KRAs)
by Indian organizations.
Study
Data was collected by obtaining the
performance appraisal forms used by
organizations. The rationale for using
forms is that a true picture is obtained of
what is actually present in the formal
system. There is a tangible consistent
basis for any observations. In case of
interviews or questionnaire surveys, there
is likely to be some inconsistency, due to
different interpretations of the questions,
and the perceptions, motivations and
knowledge of individuals. Since the nature
of the study was both exploratory and
descriptive, the objective was to collect
information from representative sample of
a wide range of different organizations.
The methodology followed for data
collection may thus be classified as a
survey, though instead of a questionnaire
or interview, forms were obtained.
The forms were collected over a period of
approximately two years from Augus t 2005
to July 2007. Ultimately, 51 forms were
obtained from 38 organizations. (In case of
one organization some data was missing
and therefore, the total of the individual
entries under some classifications may add
up to 37.)
The number of organizations in the sample
classified under the various categories was
as follows:
(i) Type: 35 commercial, 2 government
and 1 other;
(ii) Size: 27 large, 6 medium and 5 small);
(iii) Location: 6 North, 4 East, 10 West, 17
South;
(iv) Ownership: 20 Indian, 15 Multinational
Corporations (MNCs) and 2 Joint
Ventures (JVs) and
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 Employee Performance Apprai sal: The (Un) Suitability of Management by Objectives and Key Result Areas
(v) Sector: 31 private and 6 public.
Organizations from 29 different
industries/sectors were covered, including
manufacturing, services and the
government sector.
The study revealed that almost all
organizations were co ncerned with
objectives or achievements referred to
variously as objectives, targets, goals,
KRAs or Key Performance Indicators
(KPIs), work achievements or the quantity
of work.. In some cases, the KRAs were to
be set at the beginning of the year but did
not figure explicitly in the form, while in
others, they were to be specified
individually and yet others had the KRAs
listed for the function. Over 60%
mentioned objectives as a criterion for
assessment, and about 40% required the
objectives for the following year to be
specified in the form.
The findings of other researchers are as
follows. Rudrabasavaraj (1969) recorded
that in case of both PSUs and private
sector organizations, employees were
rated on both personality traits and
performance. Rudrabasa varaj (1977)
found that organizations appraised
performance or traits or both. One
organization was using MBO, two were
planning to do so and one had rejected it
after a trial. Bolar (1978) found that in
1968, actual performance was appraised
by about 55% of the organizations with
formal appraisal systems and all of those
with informal appraisal; and in 1976, by
about 78% of the organizations with formal
appraisal systems and all of those with
informal appraisal. Basu (1988) also found
that performance was evaluated by about
78% of the organizations. Rao (1982) (as
cited in Rao, 2004) reported that 62% of
the organizations used agreed tasks or
targets or functions as a basis of appraisal.
Rao, Rao, and Yadav (2001) found that
CURIE, 2009, Vol. 2, No. 2
organizations followed various a pproaches
to performance appraisal including trait
based, and performance based.
A related point concerns frequency of
appraisal. Considering those forms where
the issue was explicitly specified, almost all
organizations appeared to have an annual
appraisal. While about 70% were observed
to have only an annual appraisal, a small
number had mid term reviews too. A few
organizations also appraised at certain
milestones or at specific career points such
as at the end of probation period,
promotion, review and the like.
These findings appear to be in accordance
with that of other researchers.
Rudrabasavaraj (1969) recorded that merit
ratings in both the public sector and private
were usually carried out annually. In
addition, three private sector companies
rated employees during their trial period.
Rudrabasavaraj (1977) found that
performance appraisals were conducted
annually. Bolar (1978) found that among
those organizations with formal systems
and which adhered to them: most rated
annually, one half yearly and two quarterly.
Of those that had informal systems, most
appraised annually and some only when
they wanted to reward outstanding
performance or when there were
vacancies to be filled. There were more
frequent appraisals for trainees or those on
probation. Basu (1988) found that most
organizations appraised annually and two
semi-annually. It appears that there has
been little change over the last forty years!
Discussion
The study appears to indicate that many
organizations are not clear about the
implementation of a KRA or MBO based
approach. In particular, as mentioned
above, while over 60% mentioned
objectives as a criterion for assessment,
only about 40% required the objectives for
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 Employee Performance Apprai sal: The (Un) Suitability of Management by Objectives and Key Result Areas
the following year to be specified in the
form! This leads to some doubt a s to how
the objectives being measured are
specified and set. Furthermore, MBO and
KRA targets are like budgets and need to
be reviewed constantly, but the findings
relating to frequency do not appear to
indicate that this is being done.
Accepting the importance of appraising
performance, the question is how to do so.
While there can be little argument that
individual achievements must contribute
towards organizational objectives,
generally individuals perform a number of
tasks, not all of which can be dir ectly tied
to objectives. The smooth functioning of a
unit requires many intangible inputs. A
system that is primarily based on KRAs
cannot be universally applicable. Any job
has some requirement of normal routine
work, which may not be amenable to use
of KRAs. The use of objectives also has
some other problems which are discussed
in some detail in the following paragraphs.
Deming (2003) notes that things that are
easy to count are counted. This allows
managers to avoid having to deal with
criteria that are meaningful but difficult to
measure. Levinson (1970) points out that
as measurement and quantification gain in
importance, the finer, qualitative aspects
tend to get ignored. Related to this is what
Cook (1995) calls impression
management: many organizati ons give
great importance to relatively minor
matters that appear impressive, but have
little connection to performance. He cites
Padfield who describes how in the 1890s
the Royal Navy used to promote officers
with the most highly polished ships, which
resulted in some of them avoiding gunnery
practice because it might have spoiled
their paintwork! In an attempt to be
objective, organizations may therefore
focus on those outcomes which can be
CURIE, 2009, Vol. 2, No. 2
measured, whether or not those are the
outcomes that matter.
The more important problem is that, “Fair
rating is impossible [because] … apparent
differences between people arise almost
always from action of the system that they
work in, not from the people themselves”
(Deming, 2003, pg. 109 –110). In fact in
case of deviations, Deming (2003, pg. 315)
claims that, “94% belong to the system
(responsibility of management) and 6% [to
the employee]” So in case of all
performance, good and bad, very little of
the exceptional performance can be
credited to the employee. Hence
measuring results may not be a valid
approach. While Deming’s argument was
in the context of production, similar
conclusions may be drawn for other areas.
A related point is raised by Levinson
(1970, pg 126 - 127) who notes that …
“most job descriptions … do not
adequately take into account the
increasing interdependence of managerial
work in organizations … The more a man’s
effectiveness depends on what other
people do, the less he himself can be held
responsible for the outcome of his efforts”.
This problem is faced by managers who
may be dependent on others for crucial
information or other contributions. A simple
example is that of the sales manager who
is dependent on the production department
for supplies of the finished goods of the
correct type and quantity. The production
department is in turn dependent on proper
procurement and so on. And all these are
affected by the decisions of top
management. A decision to change
something as seemingly innocuous as
credit terms, may result in the sales force
suddenly missing their targets, with
repercussions throughout the organization.
Likewise, the question may be asked about
the extent of a boss’s contribution to a
subordinate’s performance and vice -versa.
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 Employee Performance Apprai sal: The (Un) Suitability of Management by Objectives and Key Result Areas
Rao (2004) refers to these as superior –
subordinate dyads. There can be little
doubt that the performances of both are
interdependent.
KRAs are also difficult to define for certain
functions. Areas which are profit centres
and generate revenues may not face too
much of a problem, but those departments
which are in the nature of support
functions, however important, are likely to
face some difficulty here Consider the
finance department; few meaningful KRAs
are likely to be possible. Even if one could
come up with something like reducing cost
of funds, this would depend on factors
such as the interest rates prevailing in the
period under consideration, the credit
worthiness of the organization and the
quantum of borrowings, each of which is
actually a composite of several other
factors, and none of which are u nder the
control of the CFO or any other person
being evaluated. Determining relative
performance in such a case would be so
difficult as to be impossible. Additionally,
for top management, KRAs are only
possible in terms of organisational
performance. Very often organisational
performance may be the result of external
factors and/or previous decisions. Cook
(1995) refers to this attributability: due to
complexity or long time scales, it can
become difficult to relate cause and effect.
Likewise, rapid turnover of personnel also
makes it difficult to know who is
responsible for what.
This also gives rise to questions about
governance, particularly with respect to
executive compensation. The question
arises as to what organizations are paying
for. If the price of the product
manufactured by a company goes up due
to external factors, should the employee
get the benefit? For example, when a few
years ago the price of steel rose, steel
manufacturers reported large increases in
CURIE, 2009, Vol. 2, No. 2
profits. By no stretch of imaginatio n could
this be attributed to ‘better management’!
However such increases in profits are
often cited as evidence to justify large pay
packages to top management. What
happens if the price falls? Symmetry would
surely require that managers be
penalized? Does any organization practise
this? Casual empiricism would indicate that
none does.
Then there is the question of what
yardstick is used. Is sales volume
measured in quantity or revenue? Strange
as it may sound, depending on the answer,
the company may have improved its
performance or not! In a number of
companies the quantity sold has remained
stagnant over the years but revenues show
an increase by the simple expedient of
raising prices over the years.
Another problem is that target setting is not
an exact science. Often targets are based
on a budget or corporate objective, which
is itself based on historical performance,
on some competitor’s performance, or on
average industry performance. In such
cases, as Patton (1960) observes,
appraising based on pure ly quantitative
preset goals does not leave any scope for
the appraiser to take into account the
difficulty of the feat or for any other
shortcoming in the goal setting or
inconsistencies between functions or
divisions. Expressing targets in numbers
only gives the illusion of mathematical
accuracy. When it is not possible for target
setting to be scientific, using quantitative
measures, (numbers), does not
miraculously render the process precise.
Furthermore, as also noted by Bolar
(1978), MBO was advocated as a system
to manage organizations or business units
and not individuals. As Sherwin (1976 pg
159) argues, “Performance appraisals …
cannot logically be based on the results of
51 BITS, Pilani
 Employee Performance Apprai sal: The (Un) Suitability of Management by Objectives and Key Result Areas

the MBO objectives … [because] … the MBO type approach (KRAs) for individual
1
results of a multiperson objective c annot employees.
properly be used to measure a single
However, the fundamental importance of
person’s performance.…” Ironically, this
appraisal means that it cannot be
point is also made by Drucker (2003, pg
disregarded or done away w ith. Therefore
172), “Management is about human
it becomes necessary to develop an
beings. Its task is to make people capable
approach to avoid the potential errors
of joint performance … it is the reason that
detailed above. While the employee
management is the critical determining
performance appraisal should be focussed
factor. ... our ability to contribute to society
on performance, an alternative method to
at all usually depends as much on the
measure work achievements needs to be
management of the enterprises in which
developed. As a first step, it can be left to
we work as it does on our own skills,
the discretion of appraisers and appraisees
dedication, and effort.”. Since this practice
to determine how performance should be
is not advocated b y either Drucker or
measured. A model to determine relevant
McGregor (1962) there does not appear to
measures is illustrated in Figure 1.
be any sound theoretical basis for using an

Figure 1 A Model for Analysis and Selection of Appraisal C riteria

CURIE, 2009, Vol. 2, No. 2 52 BITS, Pilani

 Employee Performance Appraisal: The (Un) Suitability of Management by Objectives and Key Result Areas
In many cases, no doubt, target based
methods will be continued, wherever it is
believed that it is fair and best to do so. In
other cases some other method/s to
measure work achievements may be
devised, and so long as such methods are
generally valid and acceptable, with no
obvious shortcomings, they should be
permitted. It may be noted that in addition
it may be useful to assess how the results
are achieved, since in case performance is
lacking, that by itself may not indicate what
is wrong, while if the other aspects of
performance (behaviours) are evaluated,
diagnosis and correction or even
improvement becomes considerably
easier.
Notes
1. The question may be raised as to why
organizations ventured into extending
MBO to individuals. One surmise might be
that the suggestions of McGregor (1962)
(individual employees should determine
their own objectives and be appraised on
the basis of their performance towards
meeting the same) and Drucker (1955)
(cascading objectives with explicit linkage
to organizational objectives) somehow got
merged and that the concept of cascading
objectives was put into practice even for
individual employees .
Acknowledgements
The author wishes to thank the anonymous
reviewers for their useful comments on the
earlier version of this paper.
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